Incorporated professionals will retain their access to the small business tax rate, but small businesses should not expect any decreases in that tax rate in the near future.
This year’s federal budget made no reference to the possibility of restricting professional corporations’ access to the small business deduction in which the first $500,000 of active business income is eligible for a tax rate of 10.5%. The Liberals had initially brought up this issue during the 2015 federal election campaign.
This is good news for professionals as “tax rates for highly skilled professionals are already extremely high,” says Jamie Golombek, managing director of tax and estate planning with Toronto-based Canadian Imperial Bank of Commerce’s wealth strategies division.
The Liberals’ concern during the campaign was that small business owners were accessing the small business deduction inappropriately. The concern was that incorporated professionals such as accountants and lawyers would incorporate their practice, take advantage of the small business rate and then leave the money in the company. They would enjoy a substantial tax deferral when it was withdrawn, explains Golombek. However, no reference to the campaign promise was made in the budget.
The Liberals do not intend to proceed with reductions in the small business tax planned by the previous government.
The tax rate was decreased to 10.5% from 11% in 2016 under Stephen Harper’s government and was supposed to fall further to 10% in 2017, 9.5% in 2018 and 9% in 2019.
“Budget 2016 proposes that further reductions in the small business income tax rate be deferred,” states the budget document.